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Taylor Wimpey - Rising costs hit profit margins

Sophie Lund-Yates, Equity Analyst | 26 February 2020 | A A A
Taylor Wimpey - Rising costs hit profit margins

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Taylor Wimpey plc Ordinary 1p Shares

Sell: 144.05 | Buy: 144.35 | Change -11.15 (-7.21%)
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Underlying profit before tax fell 4.1% to £821.6m, as broadly flat house prices and rising build costs offset volume growth.

The board plans to return around £610m to shareholders in 2020, equating to about 18.6p per share.

The shares fell 3.4% in early trading.

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Our view

Market conditions haven't exactly been ideal for Taylor Wimpey this year. The combination of stagnant house prices and increasing build costs mean margins are being squeezed and that's fed through to lower profits.

The slowdown in house price growth probably reflects the end of some pretty strong tailwinds the industry has been enjoying. Help to Buy is set to end in 2023 and the proportion of sales supported by the scheme is substantial. Help to Buy accounted for 34% of sales last year, and that will leave quite a hole to plug in a couple of years.

Fortunately other fundamental factors driving the UK housing market in recent years remain in play. Brits are ideologically committed to home ownership and the country still faces a major housing shortage. Interest rates are still incredibly low by historical standards, so mortgages remain cheap. That means that while house price growth might be sluggish Taylor Wimpey's been able to ramp up volumes to make up much of the shortfall.

It's also worth noting that the balance sheet is in better condition than in the past, with a £546m cash pile. It's worth keeping an eye on the land creditor position though, as Taylor Wimpey has promised to fork out over £700m which doesn't show up in net debt.

Still, Taylor has demonstrated good strategic planning. It's working hard to improve the way it acquires and uses land. Instead of throwing up houses where it can, Taylor's discerningly chosen to use more large and 'super large' sites going forwards, which makes a lot of sense from a margin perspective.

The final silver lining is near-term plans to increase the dividend remain unchanged, with £610m earmarked as shareholder returns this year. The prospective yield is 8.4%, although a large chunk of this is coming from special dividends, which would be first in the firing line if conditions get tougher.

Overall, Taylor Wimpey has done well and thrived while conditions have been favourable. It's important not to lose sight of the fact that an economic upset could knock a substantial hole in Taylor's profits though.

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Full year results

Group revenue rose 6.4% to £4.3bn as total completions including joint ventures rose 5% to 16,042. UK completions rose 5 to 15,719, of which 23% were affordable. Total average selling prices increased 2% to £269k, and private average selling prices increased 1% to £305k. The group recorded a record sales rate of 0.96 per outlet per week, compared with 0.8 in 2018.

Underlying build cost inflation was around 4.5%, up from 3.5% in 2018. Combined with slow house price growth this reduced operating margins to 19.6%, down from 21.6%. The group's medium-term target is around 21-22%.

The group's forward order book increased to 9,725 units, valued at £2.2bn.. The land bank fell from 5.1 years supply to around 4.8, making progress towards the group's target of 4-4.5 years supply by 2023.

Net cash fell from £644.1m to £545.7m, although this does not include land creditor obligations, which fell 1.3% to £729.2m.

The group reports that build cost inflation has started to ease and is expected to be around 3% in 2020. Management described the start to 2020 as "positive".

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